Series 65 Wrong Answers

SYZ Corporation is having a rights offering that will enable existing shareholders to acquire 1 share of SYZ common stock for each 10 shares they currently own. Under the Uniform Securities Act, this would be considered which of these? an offer of SYZ rights a sale of SYZ rights an offer of SYZ common stocK ka sale of SYZ common stock

1&3. This is obviously an "offer" of the rights (that's what the question says). In addition, the USA states that any offer of a right or warrant that gives the holder the ability to subscribe to another security is also an offer of that security.

An investor holding which of the following equity securities would NOT expect to have preemptive rights? A) Control stock. B) Preferred stock. C) Common stock. D) Common stock acquired in a private placement.

Answer: B Preferred stockholders do not have preemptive rights. Preemptive rights allow common stockholders to subscribe to additional issues of shares before they are offered to the public, to maintain their percentage ownership.

Nonqualified corporate retirement plans differ from qualified retirement plans because: I. nonqualified plan contributions are not exempt from current income tax. II. nonqualified plan earnings accumulate on a tax-deferred basis. III. the corporation need not comply with nondiscrimination rules that apply to qualified plans. IV. the corporation must comply with ERISA requirements dealing with communications to plan participants. A) II and IV. B) I and III. C) I and II. D) II and III.

Answer: B Two of the primary ways in which nonqualified corporate retirement plans differ from qualified retirement plans in that contributions are not exempt from current income tax and they need not comply with nondiscrimination rules that apply to qualified plans. Under most circumstances, the accounts do not provide for tax deferral on earnings because these plans are rarely funded. The ERISA communication requirements apply to qualified plans only.

Net asset value per share for a mutual fund can be expected to decrease if A) the fund has made dividend distributions to shareholders B) the securities in the portfolio have appreciated in value C) the issuers of securities in the portfolio have made dividend distributions D) the fund has experienced net redemptions of shares

A If dividends are distributed to shareholders, the fund's assets will decrease and value per share will fall accordingly. Appreciation of the portfolio and dividends paid to the portfolio will increase the value. If issuers have made distributions to the portfolio, the net asset value will increase. Net redemptions have no effect on the net asset value, because the money paid out is offset by a reduced number of shares outstanding.

Which of the following is not included in the definition of broker-dealer as found in the Uniform Securities Act? A) Banks B) Credit unions C) Investment advisers D) Attorneys

A In the Uniform Securities Act, it specifically states: "Broker-dealer" means any person engaged in the business of effecting transactions in securities for the account of others or for his own account. "Broker-dealer" does not include (1) an agent, (2) an issuer, (3) a bank, savings institution, or trust company. Attorneys are excluded from the definition of investment adviser, as long as their advice is incidental to their legal practice, but that exclusion does not apply to the term "broker-dealer". Even though credit unions engage in banking activity, they are not included in the exclusion. Being an investment adviser does not exclude a person from the need to register as a broker-dealer if that person is performing the functions of a BD.

A technical analyst (chartist) with a long position in a particular stock would most likely enter a sell stop order below that stock's A) support level B) resistance level C) previous high D) 200-day moving average

A Sell stops are entered below the market. They are used to turn an order into a market order if the current market value falls below the stop level. In technical analysis, support levels are theoretical levels where the market supports the stock price (keeps it from falling below the stated level). A technical analyst who makes investment decisions by watching the technical graphs and numbers would enter a sell stop below a support level in order to sell out if the support level is breached. A breakthrough of a support level is believed to forecast a major market price decline.

An agent is discussing an equity index annuity purchase with a client. The agent explains that there are several which she feels are equally suitable for the client, but one of the companies is offering a trip for 2 to Las Vegas for reaching certain sales goals. She continues by stating that this sale will put her over the goal and win her the trip. If the client purchases that annuity, the agent A)should pack her bags for the trip; she earned it B)should only sell what is suitable for the client based on all available information C)should pack her bags and leave the firm before the compliance department learns of her actions D)will probably be disciplined for failure to disclose the potential conflict of interest

A The annuity recommended by the agent is offering an incentive. The agent is clearly disclosing that fact to the client and, if the client goes ahead and makes the purchase, it is with full knowledge of the potential conflict of interest. The question states that the agent considers this annuity, along with others, to be suitable.

When Felicity died, she left her estate, including her IRA, to her daughter, Courtney. Because of her financial circumstances, Courtney decided to abjure the inheritance. This would lead to her A) disclaiming the IRA B) accepting the estate C) becoming the executrix of the estate D) contesting the estate

A When one wishes to refuse the receipt of an IRA, the procedure is known as disclaiming the IRA.

The Smiths are saving money for a down payment on a house. The Smiths have $25,000 in cash, and they estimate that in 5 years they will have approximately $31,000 if they deposit their cash in a savings account that compounds interest yearly. To calculate the $31,000 amount, the Smiths determined A) the future value of the $25,000 B) the present value of $25,000 C) the internal rate of the return on the $25,000 D) the net present value of the $25,000

A) The future value of the $25,000* To determine the money's worth at a future date (in this case, 5 years), the Smiths calculated the future value of the funds. Future value is a compounded rate of return, and in this case, the $25,000 was compounded at 5% per year for 5 years. The present value of an investment is the opposite of future value.

Which of the following statements regarding advisers who maintain custody over client accounts is NOT true? A)The adviser must arrange for the audit of client accounts by an independent public accountant on a systematic basis at least once a year. B)Advisers must send clients quarterly statements that itemize the funds and securities in the adviser's possession. C)If customer funds and securities are deposited in a bank, the bank account must only contain customer funds and identify the adviser who is acting as an agent for the customers. D)The adviser must maintain complete and accurate records of all acco

A)The adviser must arrange for the audit of client accounts by an independent public accountant on a systematic basis at least once a year. The adviser must arrange for the audit of client accounts by an independent public accountant without prior notice to the adviser, and not on a systematic basis (hence the surprise audit). The adviser must send quarterly statements to clients itemizing the funds, securities, and transactions that have occurred. The adviser must maintain accurate records of all accounts and ensure that the funds and securities are segregated by client.

Which of the following acts requires publicly traded corporations to issue annual reports?A) Investment Company Act of 1940.B) Securities Act of 1933.C) Trust Indenture Act of 1939.D) Securities Exchange Act of 1934. A) Securities Exchange Act of 1934 B) Investment Company Act of 1940 C) Securities Act of 1933 D) Trust Indenture Act of 1939

A.

After receiving some money from an inheritance, an individual purchases a rare gold coin for $10,000. Five years later, he gives the coin to his daughter-in-law after receiving an appraisal showing the coin is worth $15,000. The daughter-in-law's cost basis of the coin is A. $10,000. B) $5,000. C) $0.00. D) $15,000.

A. 10,000 (When a gift is made of an asset, whether it be a security or a collectible, the donor's cost basis passes to the donee. In this case, the original cost is $10,000 and that becomes the cost basis for the daughter-in-law)

If Wallace resigned his position as an agent with Rockland Securities to work for Gibraltar securities, which of the following parties must notify the Administrator of Wallace's move? A) Rockland, Gibraltar, and Wallace B) Gibraltar and Wallace C) Wallace and Rockland D) Rockland and Gibraltar

A. Rockland, Gibraltar, and Wallace When an agent with one broker-dealer resigns and affiliates with another, both broker-dealers and the agent must notify the Administrator of the change in registration. Notification is accomplished by filing Forms U5 and U4 with FINRA's CRD.

Which of the following acts requires publicly traded corporations to issue annual reports? A) Securities Exchange Act of 1934 B) Investment Company Act of 1940 C) Securities Act of 1933 D) Trust Indenture Act of 1939

A. SEC Act of 1934 The Securities Exchange Act of 1934 mandates that public issuers file annual and quarterly reports with the SEC.

Several entrepreneurs form an S corporation. Under which of the following circumstances will the entrepreneurs risk losing their tax benefits? 150 new investors buy into the corporation during the year. 1 new member is a nonresident alien. 50% of the corporation's income is derived from passive investments in limited partnerships. The corporation issues several classes of stock. A) I and II. B) I, II and III. C) I, II, III and IV. D) I only.

Answer: C S corporations must not have more than 100 stockholders and each stockholder must be a citizen or resident of the United States. The corporation can only have one class of stock, and no more than 25% of the corporation's income can come from passive activities. If you were not sure of this last fact, a useful test-taking technique is recognizing that all of the other choices are correct and there is no way to select them without this one.

An inverted yield curve results in part by: A) rising interest rates. B) declining interest rates. C) investors buying long-term bonds and selling short-term bonds. D) investors buying short-term bonds and selling long-term bonds.

Answer: C The demand for longer term bonds is higher than that of short-term bonds and causes a negative slope in the yield curve. If investors were buying short-term bonds in greater demand, the rates of short-term bonds would decline rather than rise.

Which one of the following option positions would generally command the greatest time value? A) puts B) straddles C) LEAPS D) calls

Answer: C LEAPS, the acronym for Long-term Equity Anticipation Securities, have expiration dates that can run more than 3 years compared to the 9 months for standard option contracts. Because time value is a direct function of the length of the option, the longer the time until expiry, the greater the potential time value

When contrasting call options, preemptive rights, and warrants, it would be correct to state: A. only call options and warrants have time value. B. only call options are traded on listed exchanges. C. only preemptive rights and warrants are issued by the underlying corporation. D. all of these are issued by the underlying corporation.

Answer: C. Corporations issue preemptive rights (if called for in the corporate charter) when issuing additional shares. Warrants are issued by corporations usually as a sweetener to make a bond issue more attractive. Call options are issued by the options exchanges, not the underlying corporation. All three of these products trade on listed exchanges and all of them have time value with warrants generally having the longest expiration date

It would be considered a prohibited activity for an agent to engage in any of the following activities EXCEPT: A) failing to record exempt transactions on the broker/dealer's books and records. B) trading in the account of a conservative client exclusively in initial public offerings with proper trading authorization from the client. C) sharing in profits of an account as a reward for the agent's recommendations exceeding the S&P 500. D) executing a transaction in a nonexempt security in a discretionary account.

Answer: D Once a discretionary account has been properly documented, the agent handling the account can trade exempt and nonexempt securities. All transactions, no matter in exempt or nonexempt securities, must be recorded on the books of the broker/dealer. As a general rule, initial public offerings tend to be on the speculative side, suitable for aggressive, not conservative investors. Therefore, even with the client's authorization, this trading profile would be unsuitable and, as a result, a prohibited activity. . Sharing in profits of an account as a reward for exceeding the S&P 500 is prohibited under any circumstance. This is not the same as sharing in the profits of an account with consent of the client and the employing broker/dealer, as this is based on the performance of the agent's recommendations.

Writing an option provides all of the following EXCEPT: A) income. B) limited downside protection when long the underlying asset. C) hedging. D) maximum protection against loss.

Answer: D Writing an option provides only limited protection for a long or short position. That protection is limited to the amount of the premium received.

If a client wanted an investment that would eliminate interest risk as to principal, you would recommend A) TIPS B) a bank-insured certificate of deposit C) preferred stock D) a 91-day Treasury bill

B Because bank-insured CDs are nonnegotiable (we're not discussing the $100k minimum jumbos), there is no market fluctuation caused by changes in interest rates as with marketable securities. If you invest $10,000, you will always get back that $10,000 whenever you cash in the CD, regardless of current interest rates. This is true even when cashing in early. There may be a prepayment penalty, but that is considered separate from interest rate risk. TIPS offer inflation protection and preferred stock is interest rate sensitive in the same manner as a bond. The 91-day T-bill doesn't have much interest rate risk, but if an investor was to attempt to liquidate the holding prior to maturity and interest rates increased, there could be a loss.

One of the assumptions underlying the capital asset pricing model is that A) only whole shares are available. B) there are no transaction costs or taxes. C) inflation must be taken into consideration. D) each investor has a unique time horizon.

B The CAPM assumes frictionless markets, i.e., no taxes or transaction costs. Among the other assumptions of the CAPM are that all investors have the same time horizon and that all investments are infinitely divisible into fractional shares. The CAPM assumes that there is no inflation.

Perpetual Prosperity Advisers (PPI), a state-registered investment adviser, files an application to withdraw its registration as a registered investment adviser. Records pertaining to client accounts must be A) sent to the Administrator of the state in which PPI maintained its principal office. B) retained for the time period specified in the NASAA Model Rule on record keeping. C) destroyed once the withdrawal has become effective. D) sent to the Administrator of the state in which the client was a resident.

B The NASAA Model Rule on record keeping requires that records relating to an investment adviser's clients be retained for a period of 5 years from the end of the fiscal year in which the record was made. Those records must be retained even though the firm is no longer in business.

Under current tax law (2019), how much can a married couple give to their adult son and his wife without incurring a gift tax obligation? A) $15,000 B) $60,000 C) Unlimited D) $30,000

B The current gift tax exclusion (2019) is $15,000 per donor to each recipient. A married couple can give $30,000 to a single individual and qualify for the exclusion. In this case, the married couple can give $30,000 to their son and $30,000 to their daughter-in-law without paying any gift tax.

The powers of the Administrator include the ability to determine A) surety bond requirements for investment advisers who do not exercise discretion or maintain custody B) minimum net worth requirements for investment advisers C) minimum net worth requirements for agents who exercise discretion D) maximum net capital requirements for broker-dealers

B The Administrator can determine minimum, not maximum, net capital for broker-dealers (but not in excess of SEC requirements) and, for investment advisers, net worth. If the investment adviser does not exercise discretion (or maintain custody), no surety bond is required. Agents who exercise discretion may need a surety bond, but not a minimum net worth.

With respect to the specific commodity that is the subject of the contract, all of the following are standardized parts to an exchange-traded futures contract except A) the quality. B) the market price. C) the quantity. D) the time for delivery.

B It is the delivery price which is standardized, not the market price (that is continuously fluctuating). Exchange-traded futures contracts offer standardized quantities and qualities (grade of the commodity) as well as a standardized time for delivery.

An investor is looking for a packed product that can provide rental income as well as potential capital gains. You would most likely recommend A) a mortgage REIT. B) an equity REIT. C) a GNMA pass-though. D) a growth mutual fund.

B When you see "rental," you immediately think of renting real estate. Of the two basic types of REITs, an equity REIT is the one that owns property. Rental income is received from the users of those properties. As an owner of real estate, there is always potential to sell the property for a gain. Think of the difference between an equity REIT and a mortgage REIT as the difference between a stock and a bond. A stock offers the possibility of income through dividends and a bond through interest. But, it is only the stock (equity) where there is a real potential for capital gain.

Samantha Wells, a British citizen temporarily working in the United States, wants to form a business venture with other investors. She is looking for favorable tax treatment of earnings and losses. She also wants to limit the number of investors, but is willing to share control of the enterprise with others to attract them. What business form do you advise to her? A)C Corporation. B)General Partnership. C)S Corporation. D)Limited Partnership.

B - Limited partnerships would not work because the other investors have limited say in how the enterprise is run. C corporations do not provide favorable tax treatment of gains or losses. While an S corporation appears to be the right answer, only U.S. citizens or resident aliens can own one.

Since its inception in 1986, virtually all the states have replaced the Uniform Gifts to Minors Act with the Uniform Transfers to Minors Act. It is generally agreed that one of the primary benefits offered by UTMA over UGMA is A) mandatory surrender of control at majority B) greater flexibility in naming custodians C) greater flexibility in the type of property that may be transferred D) greater flexibility in naming beneficiaries

C The property that may be transferred into an UGMA account is generally limited to cash and securities, while in an UTMA account, almost any kind of property—real or personal, tangible or intangible—can be transferred to the custodian.

A 68-year-old individual, who purchased a single premium immediate fixed annuity, elected monthly payments for life with a 10-year certain settlement option. If the individual lives to the age of 80, A) monthly payments will continue to the beneficiary(s) for 10 years after the annuitant's death. B) monthly payments will continue until death. C) monthly payments will remain fixed until age 78 and then reduce until death. D) monthly payments will cease at age 78.

B) monthly payments will continue until death. When choosing the settlement option, life with 10 years certain, the annuitant will receive payments until the later of death or 10 years. If the annuitant died before the 10 years, payments would go to the beneficiary.

Which of the following forms of soft-dollar compensation paid by a broker-dealer to an investment adviser is NOT allowable under the safe harbor provisions of Section 28(e)? A)Registration fees to attend an investment seminar. B)Reimbursement for travel expenses to attend an investment seminar. C)Financial planning software. D)Research reports.

B)Reimbursement for travel expenses to attend an investment seminar. Payment for travel expenses, furniture, or equipment is not allowable under Section 28(e) of the Securities Exchange Act of 1934. Payment for seminars, research, and financial planning software are permissible under the safe harbor provisions of Section 28(e).

Which of the following would NOT be defined as a sale or an offer to sell under the Uniform Securities Act? A) ABC attaches warrants to buy common stock of XYZ Corporation to a bond issue. B) ABC issues a $1.50 quarterly dividend to existing stockholders of record. C) A bonus given as a direct result of the purchase of another security. D) ABC issues a rights offering.

B. ABC issues a 1.50 quarterly dividend to existing stockholders of record ABC's issue of a $1.50 quarterly dividend to existing stockholders is not a sale as defined in the Uniform Securities Act. Bonuses are considered sales, and rights and warrants are considered offers of the underlying stock.

Which of the following would be used to provide end-of-life instructions once a person becomes incapacitated? A) An incapacitated will B) A living trust C) A living will D) A durable power of attorney

C The purpose of a living will is to give clear instructions regarding end-of-life decisions, such as organ donation or when to "pull the plug." A living trust deals with how assets are distributed

Which of the following activities would NOT be considered a prohibited practice under the NASAA Statement of Policy on Unethical or Dishonest Business Practices of Broker-Dealers and Agents? A) In order to meet production quotas, an agent opens several accounts under fictitious names B) An agent shares in the profits and losses in a customer's account without making a financial contribution to the account C) An agent opens a brokerage account at his employing broker-dealer in his wife's maiden name in order to purchase an IPO being underwritten by the firm D) An agent purchases a suitable stock for a client's account prior to receiving written discretionary authorization

B. An agent shares in the profits and losses in a customer's account without making a financial contribution to the account As long as the agent has the consent of the customer and the employing broker-dealer, profits and losses may be shared and no financial contribution is required of the agent. No purchases can be made by an agent in a discretionary account prior to receipt of the written trading authorization. Opening accounts in fictitious names or a spouses name in order to hide improper purchases are prohibited practices. Please note: The correct choice does not include the consent requirements so the statement is only partially correct. But, the other answers are definitely prohibited actions so you pick the best answer when you get something like this on the exam.

When does a customer have to receive the OCC Options Disclosure Document? A) Within 5 business days of the first options trade B) Before accepting the customer's first order to trade options covered by the ODD C) Within 15 days of account approval by the firm's designated options supervisor D) With the confirmation of the first options transaction

B. Before accepting the customers first order to trade options covered by the ODD When opening an account to trade options, the owner must be told about the risks involved with trading options. By providing the owner with an options disclosure document titled Understanding the Risks and Uses of Options, the broker-dealer satisfies the risk disclosure requirements. There are 2 alternatives for meeting the delivery requirement. It may be done before or at the time the broker-dealer approves that customer's options account or accepts the customer's first order to trade the listed options covered by the ODD.

The risk to bondholders that bonds may lose value during periods of increasing inflation is known as A) reinvestment risk B) interest rate risk C) marketability risk D) credit risk

B. Interest Rate Risk Interest rate risk is the risk that as interest rates rise, bond prices fall. Periods of inflation are accompanied by rising interest rates. Another risk in this scenario, but not an answer choice, is purchasing power risk; each semiannual interest payment has less purchasing power due to inflation, and, of course, the purchasing power of the principal at maturity will be far less as well.

Several years ago, an investor purchased an investment-grade bond with a 6% coupon. Today that bond is priced to yield 4.6% to maturity in 5 years. If the bond is called at par in one year, the bond's yield would be A) 4.6%. B) less than 4.6%. C) the coupon rate of 6% because it is called at par value. D) more than 4.6%.

B. Less than 4.6% Let's take things in order. A bond with a 6% coupon is showing a YTM below 6%, the bond must be selling at a premium. When bonds selling at a premium are called in advance of the maturity date, the "loss" (the difference between the premium and the par value") is recognized sooner than expected. This results in a yield to call (YTC) that is less than the YTM.

Investment companies must send financial reports to shareholders: A) monthly B) semiannually. C) quarterly. D) annually.

B. Semiannually

A member of the investment banking department of ABC securities is explaining some of the advantages and disadvantages of rights and warrants to the board of directors of XYZ Corporation. Which of the following statements could he make? I. The exercise prices of stock rights are usually below CMV of the underlying security at time of issue. II.The exercise prices of warrants are usually above CMV of the underlying security at time of issue. III.Both rights and warrants may trade in the secondary market and may have prices that include a speculative (time) value. IV. Warrants are often issued attached to a bond issue to reduce the interest costs to the issuer. A) I, II and III. B) I and II. C) I, II, III and IV. D) I only.

C

Among the reasons to consider investing in a variable annuity would be all of the following EXCEPT A) avoiding probate upon the death of the investor B) basically, no limit on the amount that can be contributed C) capital gains treatment on any realized gains upon withdrawal D) a guaranteed death benefit for death before annuitization

C In return for granting tax deferral on all gains in the account, the IRS taxes everything over the investor's cost basis as ordinary income. There is never a capital gain with a variable annuity. Some insurance companies will place a limit on the amount that may be invested, especially for older clients, but unlike IRS rules on retirement plans, this is strictly a company-by-company decision, not a law. Variable annuities are generally sold with a death benefit provision guaranteeing that the beneficiary will receive the higher of the amount invested or the current value of the account. Because there is a specifically named beneficiary, annuities do not go through the probate process.

A Canadian broker-dealer is registered in Province Q. The firm has clients who vacation in several New England states and they would like to continue to do business with them while on their holidays. Under the Uniform Securities Act, A) the broker-dealer may only accept unsolicited orders from their existing clients while they are vacationing in the United States B) this would only be permitted if the trades were executed through an affiliated domestic broker-dealer who is licensed in those states C) this is permissible if the broker-dealer is properly registered in Province Q, deals only with existing clients, and registers in each of the states where their clients are vacationing D) this is permissible only if the broker-dealer is registered with the SEC

C The Uniform Securities Act provides for a form of limited registration for Canadian broker-dealers wishing to do business with their clients who are vacationing or otherwise traveling through the United States. In order to qualify for the limited registration, the BD must be properly licensed in its home province and their only dealing in the states is with an existing client.

All of the following are leading indicators for economic growth EXCEPT A) stock prices as measured by the S&P 500 index B) average weekly initial claims for state unemployment compensation C) average prime rate D) orders for durable goods

C The average prime rate is a lagging indicator. The duration of unemployment is also a lagging indicator, but the number of initial unemployment claims is a leading indicator. The S&P 500 index and orders for durable goods are leading economic indicators.

When does a customer have to receive the OCC Options Disclosure Document? A) With the confirmation of the first options transaction B) Within 5 business days of the first options trade C) Before accepting the customer's first order to trade options covered by the ODD D) Within 15 days of account approval by the firm's designated options supervisor

C When opening an account to trade options, the owner must be told about the risks involved with trading options. By providing the owner with an options disclosure document titled Understanding the Risks and Uses of Options, the broker-dealer satisfies the risk disclosure requirements. There are 2 alternatives for meeting the delivery requirement. It may be done before or at the time the broker-dealer approves that customer's options account or accepts the customer's first order to trade the listed options covered by the ODD.

The yield to maturity of a bond represents the bond's A) real rate of return. B) net present value (NPV). C) internal rate of return (IRR). D) annualized rate of return.

C IRR The yield to maturity (YTM), or internal rate of return, of a bond is the total return earned on a bond that is held to maturity. A major assumption when calculating YTM is that all interest payments on the bond are reinvested at the calculated YTM. For example, if the calculated YTM is 7%, any interest payments generated from the bond are also assumed to be reinvested at 7%. The NPV indicates how the market price of the bond compares to its present value. The real rate of return, often called the inflation-adjusted return, compares the actual return with the inflation rate. The annualized return is the return an investor would have received had he held an investment for one year.

In general, from the choices given, the type of security offering the greatest degree of safety to an investor is A) preferred stock B) a debenture C) a mortgage bond D) common stock

C) a mortgage bond Debt securities, because they are an obligation of the issuer, are generally considered safer than equity securities. Secured debt is safer than unsecured debt. The only one of these debt obligations with pledged assets as security for the loan is the mortgage bond. Debentures are unsecured corporate debt obligations.

A high-risk investment strategy is the short sale of stock. Each of the following is a method of offering some degree of protection EXCEPT A) selling a put on the short stock. B) buying a call on the short stock. C) buying a put on the short stock. D) entering a buy stop order for the short stock.

C) buying a put on the short stock. The risk in selling a stock short is that the price of the stock will rise rather than fall. Those who purchase put options have the same market view as those who sell short—they will profit if the price of the security declines. Buying a put would be the equivalent of "doubling down" on your bet. The best way to hedge (protect) a short stock position is to purchase a call option on the security because that gives you a guaranteed "buy-back" price regardless of how high the stock's price rises. If you sell a put on the stock and the price rises, the put will expire and the seller will have the premium to partially offset any loss. If the short seller enters a buy stop order, once the price rises (or goes through) the stop price, a market order to buy the stock will be entered and the position will be closed out preventing any further loss.

Your elderly client has $10,000 to invest and seeks preservation of capital and a moderate income stream. If she has never invested in mutual funds before and all of her savings are in bank CDs and saving accounts, you should recommend A) a tax-exempt bond fund B) a T-bill C) a money market fund D) a government bond fund

C. A money market fund is the most appropriate for an elderly person seeking preservation of capital and some income on a regular basis. A T-bill, although safe, provides interest income only at maturity. Because the client has never invested in mutual funds before, she may be uncomfortable with the potential fluctuations in principal of the bond funds. This exam will not want you to go so far as to claim, "but if the client purchased 4-week T-bills, there would be the ultimate safety and income every 28 days." No client with this background is going to be trading every month—don't go there.

In general, the most passive investment style for a portfolio would be A) value. B) buy and hold. C) indexing. D) contrarian.

C. Indexing This is a close call between indexing and buy and hold. We believe that the NASAA philosophy on this would be that buy and hold does require some management after the portfolio is set up. That is, some companies go out of business or are merged into other entities or go private and that requires making new decisions. The same can happen with the companies in an index, but the investor doesn't have to make the changes. When you invest in an index, it is sort of like (with credit to Ron Popeil) "set it and forget it". Clearly, the other two choices are not passive in the same way.

Thirty years ago, an investor deposited $100,000 into a single premium deferred variable annuity. Today, the value of the accumulation units is $1.5 million. The investor is ready to annuitize and wishes to maximize monthly payments to be received. You would suggest which of the following settlement options? A) Life with 20 years certain B) Joint and survivor C) Straight life D) Life with 10 years certain

C. Straight Life When one annuitizes, the amount of the annuity payment is highest when the annuitant takes the most risk (and the insurance company the least). Straight life payments end upon the death of the individual, and if that should be the following month, the insurance company keeps the rest of the money. In the period certain choices, the insurance company is "on the hook" for that number of years, even if the annuitant does not live that long.

When a corporation domiciled in the U.K. issues U.S. dollar-denominated bonds in the United States, it is issuing A) ADRs. B) Ameribonds. C) Yankee bonds. D) Eurobonds.

C. Yankee Bonds Yankee bonds are foreign bonds, denominated in U.S. dollars and issued in the United States by foreign banks and corporations. ADRs are issued in the U.S. by domestic banks and represent receipts for securities traded on foreign exchanges. Eurobonds are issued by a borrower in a foreign country, denominated in a currency other than one native to the issuer's country. Yankee bonds are a form of Eurobond, but that is not the best answer to this specific question.

Which of the following would not constitute a conflict of interest between the plan and a fiduciary? A) A fiduciary sells a real estate investment to the plan at the current market rate. B) A fiduciary participates in a transaction on the plan's behalf that involves a party with interests adverse to those of the plan in order to ensure favorable terms for the plan. C) A fiduciary offers reduced commissions to the plan for transactions that are executed through his employing financial institution. D) The fiduciary receives fees for acting as a trustee to the plan.

D A fiduciary can receive compensation from the sponsor of the plan for acting as a trustee, if fees are reasonable and consistent with duties performed. A fiduciary may not sell a real estate investment to the plan at the going market rate. Such self-dealing presents a conflict of interest regardless of the terms of the transaction. A fiduciary may not participate in a transaction on the plan's behalf that involves a party with interests adverse to those of the plan in order to ensure favorable terms for the plan. The situation is self-dealing and presents a conflict of interest prohibited under ERISA. Offers of reduced commissions to the plan for transactions that are executed through his employing financial institution are prohibited and a conflict of interest.

Which of the following individuals employed by an investment adviser would be required to be registered as an IAR? A) An intern who receives no compensation whatsoever B) The vice president of human resources C) The night watchman D) A chief compliance officer (CCO) who has no sales duties

D Any individual performing the functions of an investment adviser representative must be so registered. Among those duties is supervisory responsibility, and the CCO has the job of ensuring that the firm and all of its employees follow the rules. Although executive officers are generally automatically registered as IARs, that is only the case when the job function is one involving activities relevant to IARs (and human resources is not one of them).

Stock prices in the over-the-counter market are determined by A) a competitive bid B) an auction C) the 5% markup policy D) negotiation

D The 5% markup policy is a FINRA policy regulating commissions and markups, not prices. The OTC market is considered to be a negotiated market in contrast to a stock exchange, which is an auction market.

A working group convened by NASAA has developed a model fee disclosure schedule to help investors better understand the costs involved in doing business with their broker-dealer. The template has broker-dealers disclose all of the following fees EXCEPT A) interest on debit balances in margin accounts B) safekeeping of customer funds and securities C) the cost of overnight delivery services D) markups and markdowns on trades done as a principal

D There are 3 primary expenses involved with brokerage accounts that are not included in the fee disclosure template. Those are: commissions; markups and markdowns; and advisory fees for those firms that are also registered as investment advisers.

Under the Uniform Securities Act, the Administrator may require that a prospectus for a security registered under qualification be sent or given to each person to whom an offer is made A) within 72 hours of the effective date. B) before or concurrent with the filing of the registration statement. C) only upon request of the offeree. D) before the sale of the security.

D Under registration by qualification, the USA specifies that the Administrator has the power to require prospectus delivery before the sale of the security. That means the offeree (the investor), receives the prospectus prior to making a purchase. There is no prospectus prior to or concurrent with the filing. Because the prospectus is not available until the effective date, one can't be distributed prior to the effective date.

An investor interested in investing in sovereign debt would most likely purchase A) bonds backed by gold sovereigns. B) bonds issued by the Bank of the United States. C) European Central Bank debt issues. D) Sweden 2.5s of 2032.

D) Sweden 2.5s of 2032 Sovereign debt refers to bonds and other debt instruments issued by a specific country. The European Central Bank manages the currency of the 19 countries who have adopted the Euro. There is no such thing as the Bank of the United States and gold sovereigns are coins - they are not used to back debt.

A nonqualified, single-premium variable annuity differs from a Keogh plan in that: A) earnings are tax deferred B) it is open to self-employed persons C) both are subject to early withdrawal penalties D) all payouts are fully taxable in a Keogh plan

D) all payouts are fully taxable in a Keogh plan. Earnings on investments made in both a Keogh plan and nonqualified annuity grow on a tax-deferred basis; they are not taxed until withdrawn. The cost basis in a Keogh plan is zero because contributions are tax deductible but distributions are fully taxable upon receipt. However, in a nonqualified annuity, the cost basis is equal to the amount invested because the contributions are nondeductible; only the earnings portion of the distributions is taxable.

Investors with a short time horizon most likely will invest in which class of mutual fund shares? A)Class A shares, then convert to Class B shares B)Class B shares C)Class A shares D)Class C shares

D. Class C shares. Class C shares may be less expensive than Class A or B shares for investors with a short time horizon. The front-end load on Class A shares and the back-end load on Class B shares makes them unattractive for short-term investors. A shares do not convert to B shares.

Jefferson, Adams, and Washington (JAW) is a pension consulting firm whose only office is on Constitution Avenue in Washington, D.C. JAW has only one advisory client—a U.S. government employees pension fund with assets of $4 billion. What are this firm's registration requirements? A)It does not have to register because its only client is the United States government. B)It can only register with the SEC because the District of Columbia is not a state C)It must register with the SEC because the AUM is so high. D)It may choose to register with either the D.C. Administrator or the SEC.

D. Under the provisions of the Dodd-Frank Act of 2010, once a pension consultant's AUM reaches $200 million, it has the choice of state or SEC registration. Under the USA, the District of Columbia (along with Puerto Rico and any U.S. territory or possession) is included in the definition of state. If an investment adviser only gives advice on securities issued or guaranteed by the U.S. government, it is excluded from the definition of investment adviser and doesn't register anywhere, but that is not the same as having the government as your only client.Reference: 3.3.2.1.4 in the License Exam Manual

Customer A and Customer B each have an open account in a mutual fund that charges a front-end load. Customer A has decided to receive all distributions in cash, while Customer B automatically reinvests all distributions. How do their decisions affect their investments? I. Receiving cash distributions may reduce Customer A's proportional interest in the fund. II. Customer A may use the cash distributions to purchase shares later at NAV. III. Customer B's reinvestments purchase additional shares at NAV rather than at the offering price. IV. Due to compounding, Customer B's principal will be at greater risk. A) II and III B) I and IV C) II and IV D) I and III

D. I and III If the customer elects to receive distributions in cash while other investors purchase shares through reinvestment, his proportional interest in the fund will decline. Automatic reinvestment is always at NAV.

Typical broker-dealer fees that must be disclosed as part of a fee disclosure document would include: I. a charge when a client requests that a stock certificate be issued in his name II. a commission charge when a client buys a security on a listed exchange III. the interest charged by the firm on money owed by customers in their margin accounts IIII. fees for providing advisory services to high-net-worth individuals

I & III If we know what charges are not included in the fee disclosure, it is easy to recognize those that are. There are 3 primary expenses involved with brokerage accounts that are not included in the fee disclosure template. Those are: commissions; markups and markdowns; and advisory fees for those firms that are also registered as investment advisers.

To comply with the regulations regarding customer identification programs, the minimum identifying information that must be obtained from each customer before opening an account includes: I. name. II. verbal assurance that the customer is of legal age. III. a street address, unless the primary mailing address is a post office box located in the state of residence. IV. a taxpayer identification number.

I and IV

One of your clients has recently turned 72 and has questions about RMDs. The client has a traditional IRA, a rollover IRA, and 401(k) plans from 2 previous employers. When computing the RMDs, I. the RMD from each IRA is computed and may be made from one or both of them II. the RMD from each IRA is computed and must be paid from that IRA III. both 401(k)s are combined to compute the required distribution, which may be made from one or both of them IV. the RMD from each 401(k) is computed and must be paid from that 401(k)

I and IV For RMD purposes, each IRA is figured separately and the distribution can be made from one or all of them. That is not the case with a 401(k) plan. Each account has an RMD that can only be paid from that account.

An investment policy statement would likely include: I. expected returns of the recommended strategy and the expected range of these returns II. recommended allocations among differing asset classes III. strategies used for selecting specific stocks in the equity portion of the portfolio IV. disclosure of the fees that the adviser will earn for implementing the recommended strategy

I, II, III Disclosure of fees does NOT go on the IPS

An investor owns a TIPS bond with an initial par value of $1,000. The coupon rate is 6% and, during the first year, the inflation rate is 9%. How much interest would be paid for the year?

TIPS bonds have a fixed coupon rate with a principal that varies each 6 months based on the inflation rate. With an annual inflation rate of 9%, each 6 months, the principal increases by 4.5% (half of the annual rate). Each semiannual coupon is half of the 6% rate times the new principal. The arithmetic is: $1,000 × 104.5% = $1,045 × 3% = $31.35 plus, $1,045 × 104.5% = $1,092 × 3% = $32.76. Adding the 2 interest payments together results in a total of $64.11 for the year.

Which of the following is regulated by the Securities Exchange Act of 1934? A) Exemptions of new issues from registration requirements. B) Requirements for the provisions of a prospectus. C) Registration of new issues of stock. D) Regulation of exchanges.

The purpose of the Securities Exchange Act of 1934 is to regulate secondary market trading of securities that have already been issued. It created the SEC and requires that all securities exchanges and firms register with the SEC if they are involved in interstate commerce. It was the Securities Act of 1933 that dealt with registration and exemption from registration of new issues and prospectus delivery requirements.

According to the Investment Advisers Act of 1940, under which of the following circumstances is an exculpatory provision acceptable in a contract between an investment adviser and its clients? A) This provision is prohibited under all circumstances B) The client is purchasing government securities only. C) The client has received written disclosure of this provision and has signed a written acceptance prior to any transaction. D) The client is a broker/dealer.

This provision is prohibited under all circumstances. An exculpatory clause is part of an agreement which relieves one party from liability. It is a provision in a contract which is intended to protect one party from being sued for their wrongdoing or negligence

In the secondary market, U.S. Treasury bond prices are most influenced by A) the inflation rate B) the prime rate C) the Treasury Department D) the primary dealers

a In the secondary market, the rate of inflation has the greatest influence on all bond prices. There are two major influences on the price of bonds in the secondary market. One of those is the amount of credit risk (chances that the issuer won't be able to pay the interest and/or principal). That is not considered a risk with U.S. Treasury securities. The other, and generally stronger influence, is the inflation rate. Inflation eats away at the fixed income and principal of bonds. To compensate, the bonds must offer a higher return. That is either in the form of a new bond carrying a higher coupon rate, or, as this question refers to, trading in the secondary market at a lower price. Remember the inverse relationship between interest rates and bond prices. Interest rates follow the inflation rate, so when inflation rises, so must the yield on bonds. The yield on outstanding bonds increases as the market price decreases

An order is received from one of your clients to purchase 200 shares of GEMCO common stock at 45 GTC. Two days later, while at a luncheon meeting with a different client, you are informed by that individual that the inside scoop is that GEMCO is going to be the subject of an FBI investigation. An hour after you return from lunch, you see an execution report for the 200 shares at 44.90. Under the Insider Trading and Securities Fraud Enforcement Act of 1988, you A) are not in violation because the order was placed before you learned of the inside information B) are not in violation because the trade was the result of an unsolicited order C) are in violation because you should have canceled the order the moment you received the tip D) are in violation because you should have called the client immediately and had the ordered canceled

a. Violations of the insider trading rules can only happen when a person acts on the information. Because the order was placed on the books prior to the agent learning of the inside information, there is no violation. There is no obligation to cancel the order, and contacting the client would be making use of the inside information.

Which of the following is a component of U.S. fiscal policy? A) Reserve requirements B) Money supply C) Taxes and budgeting D) Discount rate

c U.S. fiscal policy is determined by the president and Congress through budgeting and taxation. The other 3 choices are monetary policies employed by the Fed.

All of the following are true about education funding plans except A) proceeds in 529s may be withdrawn income-tax free only if used for qualified educational expenses. B) proceeds in ESAs may be withdrawn income tax free for qualified education expenses even if the child is under age 18 C) a beneficiary of an ESA who withdraws the funds for nonqualified expenses will be taxed on the entire amount of the withdrawal plus a 10% penalty D) Section 529 plans allow a gift tax exclusion equal to five times the annual limit that may be repeated every 5 years

c A beneficiary of an ESA who withdraws the funds for a nonqualified expenses will be taxed on the entire amount of the withdrawal plus a 10% penalty. The tax and 10% penalty is only levied against earnings since the contributions were made with after-tax dollars. ESAs may be used for any level of education, including elementary school where it is hoped that the student would be under age 18. In order to receive the favored tax treatment, the proceeds must be used to pay for qualified educational expenses. Section 529 plans have the unique 5-year front-loading feature.

Investment advisers who preach the benefits of strategic asset allocation do so because they believe A) over the long run, strategic management will eventually outperform the market B) active management of a portfolio offers tactical benefits C) the market is basically inefficient and there is a strategy that can beat it D) the market is perfectly efficient because stock prices reflect all available information

d The primary difference between strategic and tactical asset allocation comes down to the belief by those following the strategic style that it is not possible, over a long period of time, to beat the market.

Which of the following are regulated under the Securities Exchange Act of 1934? i. New issues ii. Broker-dealers iii. Transfer agents

ii & iii

A corporation offering securities registered under the Act of 1933 may make which of the following statements? I. "The SEC has passed on the merits of these securities as an investment." II. "The SEC has released our securities for sale to the public." III. "The SEC has passed on the accuracy of the information in our prospectus." IV. "The SEC has declared this prospectus effective."

ii and iv When a security registers with the SEC, the date that sales are allowed is known as the effective date. The SEC neither approves nor disapproves an issue, nor does it pass on the accuracy or adequacy (completeness) of the information presented in a prospectus.

Which of the following is a motivation for creating structured products? Structured products A) are less expensive for investors to buy and trade. B) improve market completeness. C) improve profits for broker-dealers. D) reduce costs to issuers.

improve market completeness. Primary motivation for financial structuring is to increase market completeness. What does that mean? As stated in the LEM, structured products are created to meet a specific need for which there is nothing available in the current market. Creating this structured product is said to be "completing the market." Creating structured products is a cost to issuers. Investors pay fees to access structured products in addition to transaction costs. They may, in fact, improve the structuring broker-dealer's profits, but that is not what NASAA will be looking for as an answer.